As an adult, you likely understand the importance of paying your bills on time. Unfortunately, sometimes life throws curveballs your way that lead to missed payments. How innocent is missing a payment and how easy is it to recover from?
Seeing as payment history is the most important factor in your credit score (FICO 8 and VantageScore), paying late can have damaging effects. However, it isn’t a black and white scenario. There are some instances where a missed payment won’t destroy all efforts you’ve made to build a good credit score.
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What is payment history?
In relation to a credit score, your payment history refers to your repayment patterns or behavior. It looks at your history of on-time, missed payments, and how frequently you pay. This information gives lenders an idea of how trustworthy you are and whether they should give you money.
Credit bureaus keep track of your payment history by recording it on your credit report. Paying your bills on time is so critical as it’s the most influential factor in your credit score.
Credit score breakdown
Not everyone is aware of how much weight their payment history holds. There are various scoring models used to calculate your credit score, but FICO—the most widely used model—places great emphasis on payment history. Here is a breakdown of how scoring models calculate your score:
- 35% payment history
- 30% amount owed
- 15% length of credit history
- 10% new credit
- 10% types of credit
As you can see, payment history takes up a sizeable chunk of the pie and isn’t something you should ignore.
Payment history factors
Let’s take a closer look at payment history. What factors are used to assess your credit history?
- How often you pay your balances
- How many overdue items you have on your credit report
- How overdue your payments are
- The amount of money you owe on accounts you’ve missed payments on
- How long it’s been since delinquencies, collections, or bankruptcies
- How many accounts you pay on time
These factors work together to help you build a stellar credit score or hurt your score, depending on your payment behavior.
How long does payment history go back on each account? Assuming your accounts are still active, positive information can stay on your credit report indefinitely. Closed accounts with on-time payments can go back as far as 10 years from the last update on your account.
That said, negative items can remain on your report for 7-10 years, depending on the nature of the item. Missed payments in your credit history remain for seven years from the date the payment was missed.
How missed payments work
Missed payments aren’t always intentional, sometimes life happens. However, ignoring them makes matters worse, so it’s best to take immediate action. Here is a quick walkthrough of what happens if you pay late or miss a payment.
Late versus missed payments
You forgot about your credit card bill payment and missed the due date. What happens next? The first consequence is likely a late payment fee, which should show on your next billing statement. Some lenders will also increase your interest rate or subject you to what’s called a penalty APR. It can lead to higher interest on future purchases or your current balance (if not paid within 60 days).
Do late payments affect your credit score? It depends on how late the payment is.
If you pay before the 30 days (or the end of the next billing cycle), lenders shouldn’t report it to credit bureaus. However, if you pay 30 days after the due date, your lender is likely to inform credit bureaus that you have missed a payment.
Some lenders may wait for the payment to be 60 days late before they begin reporting the missed payment, but this depends on the lender and is not guaranteed.
For medical collections, a 180-day period is provided to give insurance benefits time to kick in. As long as a medical bill gets paid by either you or your insurance before this 180-day period ends, then the collection account will not appear on your credit report.
Missed payments stay on your credit report for seven years from the date the payment was missed.
If it’s your first time paying late and you have an otherwise excellent credit history, you may be able to take steps to avoid damaging your score. You can try calling your lender and asking them to waive the fee and excuse the late payment. This is known as a “good faith” correction to your credit report.
When you don’t make the minimum payment on your account by the set due date, your account becomes delinquent. For credit cards, this is usually 30 days, while for an installment loan, it could be as few as two days.
The only way to make delinquent accounts current is to pay the late payment in full and subsequent payments on time. Note that even if you pay future payments on time after missing one, late payments are still recorded until you pay the original missed payment in full.
Even when you bring your account up to date, a delinquency will still show on your credit report for seven years from the date of your first late payment.
If you continue missing payments over an extended period or don’t pay the agreed amount, you risk the chance of your account entering default status. Every lender gives a different time window before moving your account status to default. For instance, for federal loans, it’s 270 days while for credit cards it’s usually 180 days. A defaulted credit card is also known as a “charge-off.”
Once lenders default your account, they could choose to;
- Give the debt to a collection agency
- Take legal action
- Apply at court to repossess collateral used to secure the loan (for example, they can repossess your car if you default on an auto loan)
One of the worst things that can happen to your credit history is debt collection. If you leave your accounts unpaid, they could eventually go into collections. When this happens, lenders have cut their losses. The next step is usually to sell your account to a debt collection agency.
As with missed payments, collections remain on your account for seven years. Paying off the debt and making future payments on time can help minimize the impact on your score. However, a paid collection account will generally still remain on your credit report for seven years from the date the account first became delinquent.
There is a silver lining if your collection is under $100. Thanks to FICO 8 and 9, debts that small shouldn’t impact your score. Also, if a lender is using FICO 9, VantageScore 3.0, or VantageScore 4.0 to check your credit history, you won’t be penalized for collections you’ve paid in full.
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Reversing the effects of missed payments
When a missed payment is recorded on your credit report, it can be discouraging. If you have an excellent credit score, one missed payment can decrease your score by as much as 100 points.
The most surefire way to reverse the effects is to pay on time moving forward. However, there is another option that may work if you have a good track record of paying on time.
Sometimes, creditors are willing to remove delinquencies from your account if you’ve been a reliable customer in the past. Consider calling or writing them a deletion letter, asking them to remove the delinquency from your report. If they do agree, be sure to get it in writing before paying the debt.
Unfortunately, you won’t be able to use the same method once your account goes into collections. Even if you pay off the debt, the collection account will remain on your credit report. If you pay it off, it will be listed as “paid in full” as opposed to “settled in full” if you settle the debt for a portion of what you owe.
There are a few exceptions to the rule when it comes to rectifying your payment history. One of the few instances is when credit bureaus don’t report your payment history accurately. That’s why it’s good to check your credit report periodically. Here are two mistakes that can lead to bad credit history.
What is debt re-aging? When lenders or collection agencies change your account history. This can be both good or bad, depending on the context.
A good example of debt re-aging is when late payments are removed, or your account is updated from delinquent to current. Contrarily, re-aging is bad when the clock resets on delinquencies as that means they end up staying on your report longer than 7 years.
Some debt collectors do this, so they have longer to hound you for repayments. It’s also an honest mistake that can occur when your account is changing hands.
Your debt can be sold from one collection agency to the next, and sometimes this results in duplicate collection accounts. Put simply, it’s when they resell your debt and don’t delete it from your credit report, making it look like you have several accounts open for the same debt.
In some states, it’s illegal for debt collectors to re-age debt, so don’t take it lightly. If you find your account has the wrong date of first delinquency (the first time you missed a payment), contact credit reporting companies to have it fixed. You may need proof of the first delinquency to prove your case.
Improving your payment history and credit profile
Now that you know all the basics of payment history, how can you ensure you stay on track?
- Make your minimum payments on time. To avoid forgetting, you can set up automatic payments, so the minimum balance comes straight out of your bank account. Alternatively, set reminders with an alarm before the due date.
- Ask lenders for a grace period, if for any reason you know you won’t be able to pay your credit card, utilities, or loan payments on time. Many are open and willing to grant it to you, especially if you aren’t usually late on payments.
- Request late payment fee reversal if you mistakenly pay late. Make sure you pay what you owe in full before the 30-day period is up to avoid it going on your credit report. Note that lenders are under no obligation to say yes to fee reversals and removing delinquencies.
- Keep your credit utilization low; under 30% if possible. It will also make it easier to clear your balances if unforeseen circumstances arise.
- Check your credit report regularly for any inconsistencies. Mistakes happen and you don’t want to have to pay for them when they aren’t your fault.
It isn’t always easy to keep up with finances, but it’s critical that you keep your payment history on track. Doing so will make a significant difference in your credit profile.
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Article last modified on November 22, 2022. Published by Debt.com, LLC